Asia stocks back from the brink as Wall St. rallies

SYDNEY (Reuters) – Asian share markets were trying to find their footing on Wednesday as a semblance of calm returned to Wall Street where major indices bounced into the black after days of deep losses.

Analysts said distressed selling by leveraged funds looked to have run its course for the moment, allowing volatility to abate a little, though the prospect of monetary tightening across the globe remained a challenge for the long term.

“The removal of stimulus in a measured way is a perfectly reasonable proposition, although it has yet again caught the unprepared by surprise,” said analysts at AMP Capital.

“Given rates are going to rise in the Atlantic economies over the coming months, we may see further jitters.”

For now, the mood was one of relief. MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.7 percent, recouping some of Tuesday’s 3.5 percent fall. That had been its biggest daily drop since August 2015.

“The only surprise about the current volatility is that it hasn’t happened sooner. Normally, even in a bull market, investors should expect a sell-off of 10-percent-plus at some point,” said Richard Titherington, chief investment officer of EM Asia Pacific Equities at J.P. Morgan Asset Management.

“While a major market downturn is possible, it is not our current expectation. The underlying backdrop of an improving global economy, a weakening US dollar and a pickup in global earnings all remain supportive factors.”

Investors took their cue from a late rebound on Wall Street, though many had an anxious eye on E-Mini futures for the S&P 500 which were off 0.3 percent in Asian trading.

The Dow had ended Tuesday up 2.33 percent, while the S&P 500 added 1.74 percent and the Nasdaq 2.13 percent. The Dow carved out a 1,100-point trading range in all, a painful return of volatility to a market that until recently was marked by an absence of major shifts.

It was also a wild ride for Treasuries, with US 10-year yields diving as deep as 2.65 percent before a fresh sell-off dragged them back up to 2.80 percent – the sort of range seen very rarely.

While the pullback in bonds was a hint that risk appetite might be returning, it also had the potential to trigger another spasm of selling in stocks.
BLAME THE ALGOS

It was a steep spike in yields last Friday that sparked the initial rout on Wall Street, forcing sales by a host of highly leveraged funds which ramped up volatility and drove yet more selling.

Many of these were algorithmic funds crowded into similar trades – long stocks and short volatility. The selling then cascaded through their computer systems in a way almost beyond human intervention.

The pivotal gauge of S&P 500 volatility, the VIX, did come off almost 20 points overnight but was still relatively elevated at 29.98 percent.

“Short volatility funds were caught by the spike in the VIX and had to cover,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.

“You’re a genius until you’re not and when it takes just a day or two to unwind your whole strategy then you were never a genius,” he added. “But volatility does cluster, so there is no guarantee that markets are out of the woods yet.”

With stocks calming, investors also unwound safe haven positions in currencies. That saw the Japanese yen retreat and a rally in riskier plays such as the Australian and New Zealand dollars.

The Aussie was up at 86.40 yen from a low of 84.95, while the US dollar popped to 109.48 yen from a trough of 108.46. The euro was relatively stable at $1.2377, while the dollar edged up 0.07 percent against a basket of currencies to 89.647.

Gold, another supposed safe harbour, fell back to $1,328.28 an ounce after touching a three-week low at $1,319.96. Oil prices looked to be steadying after a third straight session of losses, with US crude for April adding 51 cents to $63.62. Brent crude futures gained 42 cents to $67.28 a barrel.